Question

On July 1, based on prior experience, Rocky estimated there is a 40% chance it will earn the bonus for July tours. It guided a total of 10 days from July 1–July 15. On July 16, based on Rocky’s view that it had provided excellent service during the first part of the month, Rocky revised its estimate to an 90% chance it would earn the bonus for July tours. Rocky also guided customers for 15 days from July 16–July 31. On August 5 Rocky learned it did not receive an average evaluation of "excellent" for its July tours, so it would not receive any bonus for July, and received all payment due for the July tours.

Answer 1

Answer:

a)

Account receivable is $28,000

Service revenue is $28,000

b)

Account receivable is $42,000

Bonus receivable is $7,000

Service revenue is $49,000

c)

Account receivable is $70,000

Bonus receivable is $7,000

Service revenue is $7,000

Explanation:

Rocky Guide Service provides guided 1-5 day hiking tours throughout the Rocky Mountains. Wilderness Tours hires Rocky to lead various tours that Wilderness sells. Rocky receives $2,800 per tour day, and shortly after the end of each month Rocky learns whether it will receive a $280 bonus per tour day it guided during the previous month if its service during that month received an average evaluation of "excellent" by Wilderness customers. The $2,800 per day and any bonus due are paid in one lump payment shortly after the end of each month.

a) On July 1, based on prior experience, Rocky estimated there is a 40% chance it will earn the bonus for July tours. It guided a total of 10 days from July 1–July 15.

b)  On July 16, based on Rocky’s view that it had provided excellent service during the first part of the month, Rocky revised its estimate to an 90% chance it would earn the bonus for July tours. Rocky also guided customers for 15 days from July 16–July 31.

c) On August 5 Rocky learned it did not receive an average evaluation of "excellent" for its July tours, so it would not receive any bonus for July, and received all payment due for the July tours.

a) During July 1–July 15, Rocky estimated a less than 50% chance (i.e 40%) it will earn the bonus for July tours. Using most likely approach since the chance of expecting a bonus is 40% which is less than 50%, Rocky would not receive any bonus.

Therefore: Revenue = $2800 per tour day × 10 days = $28000

Total revenue =  Revenue = $28000

Total revenue is $28,000

Account receivable is $28,000

Service revenue is $28,000

b)  During July 16–July 31, Rocky estimated more than 50% chance (i.e 90%) it will earn the bonus for July tours. Using most likely approach since the chance of expecting a bonus is 90% which more than 50%, Rocky would receive the bonus.

Therefore: Revenue = $2800 per tour day × 15 days = $42000

Bonus earned = $280 per tour day × (10 + 15) days = $7000

Total revenue =  Revenue + Bonus earned = $42000 + $7000 = $49000

Total revenue is $49,000

Account receivable is $42,000

Bonus receivable is $7,000

Service revenue is $49,000

c) On August 5, Rocky learned he would not receive any bonuses and receives only $60000 (i.e $42000 + $28000) in account receivable. Rocky reduces his bonus to zero and records the offsetting adjustment.

Account receivable is $70,000

Bonus receivable is $7,000

Service revenue is $7,000